| This dissertation consists of three essays. In the first, we find a significant positive relation between average stock variance and the return on the market. There is, therefore, a tradeoff between risk and return in the stock market, except that risk is measured as total risk, including idiosyncratic risk, rather than only systematic risk. Further, we find that the variance of the market by itself has no forecasting power for the market return. These relations persist after we control for macroeconomic variables known to forecast the stock market.; In the second essay, I study the link between population age structure, net outflows (dividends plus repurchases less net issues) from the stock market and stock market returns in an overlapping generations framework. I find that the outflows from the stock market are positively correlated with the changes in the fraction of old people (ages 65 and over) and negatively correlated with the changes in the fraction of middle-aged people (ages 45 to 64). Changes in population age structure also add significant explanatory power to equity premium regressions. The population structure adds to the predictive power of regressions involving the investment/savings rate for the US economy. Finally, international demographic changes have some power in explaining international capital flows.; In the third essay, we reexamine the forecasting regressions which predict excess stock market returns with lagged dividend-yield ratios and dividend-price ratios. Prior to 1990, the conditional dividend yield could reliably outperform the historical equity premium mean in predicting future equity premia in-sample. But our paper shows that the dividend ratios could not outperform the prevailing unconditional mean out-of-sample. As of 2000, even this in-sample predictive ability has disappeared. Our paper also documents changes in the time-series processes of the dividends themselves and shows that an increasing persistence of dividend-price ratio is largely responsible for weak stock return predictability. |
